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It is some time since mobile phones in Japan turned into multi-function gadgets allowing users to enjoy everything from e-mail, online games and music downloads to photos and video clips.

The growing sophistication of handsets, which will be showcased in style at the CommunicAsia show in Singapore this week, means that those who are technologically challenged, or simply lazy, never find out the many handy things their devices can do.

But the recent slowdown in sales growth has forced Japanese mobile phone operators to try to come up with even more innovative ways of using their mobile phones, not only to boost profits but also to stop users switching to rival operators.

Last year NTT DoCoMo, Japan’s largest mobile phone group, launched a series of handsets embedded with a smart card called FeliCa, and rolled out the first contact-less mobile wallet service in the world.

FeliCa phones allow users to make payments at stores, go through the ticket barrier at train stations and even open some hotel doors with the swish of their mobile handset.

DoCoMo believes the mobile wallet will be the next big thing in the industry.

“Mobile phones are among the top five things people use every day, so we believe people will want to be able to buy tickets and do other things with their mobile phones,” says Yuki Teranishi, in DoCoMo’s multimedia services department.

The chip embedded in the phones, also called FeliCa, was developed by Sony and includes an antenna which instantly transmits information from the mobile handset to reader/writer devices in stores, ticket barriers and wherever personal identification is needed. The antenna also enables the chip to detect weak electronic data emitted by the reader/writer device. This function is retained even when the handset is turned off.

Users who want to sign up to a particular FeliCa service - such as payment at stores - need to access the service’s website on the internet via DoCoMo’s i-mode service for internet access. The relevant data is downloaded from the website using a Java i-appli programme and stored in the FeliCa chip.

In the case of Edy, a pre-paid electronic payment system operated by a joint venture between Sony, DoCoMo and others, the service is already pre-loaded into DoCoMo’s FeliCa handsets so the procedure is much simpler.

Edy users can charge their phone with up to Y50,000 at a time at the reader/writer machines installed in stores or online.

The spread of Edy, which has been available in the form of integrated ciruit cards since 2001, helped to kick-start i-mode FeliCa services when DoCoMo launched the handsets last July. By that time there were already 5.1m Edy cards in use.

The i-mode FeliCa service can be used at 20,000 outlets, such as convenience stores, in over 1,000 vending machines and a host of other outlets including movie theatres and karaoke bars, depending on the services the user signs up for. So far, there are 30 service providers offering different services for i-mode FeliCa users.

Next year, JR East, the former public railway group, will introduce ticket barriers that will also accept FeliCa-enabled phones, although its service is confusingly called Suica.

Nonetheless, DoCoMo has had an uphill struggle getting service providers to sign up. It is a chicken-and-egg situation in which service providers do not want to invest in the system until there is a critical mass of users while users do not have an incentive to buy a FeliCa phone until there are sufficient services available.

In particular, shop owners are reluctant to invest in the reader/writers, which can be costly, when they already have credit card machines and other equipment cluttering up their counter space. Furthermore, shop owners need to install a different reader/writer for each service they want to make available to their customers.

To overcome their reluctance DoCoMo has agreed to provide a loan to help cover the cost of reader/writers in return for a share of the revenues generated from their use.

Getting users to sign on to FeliCa services is also tricky in part because it is new and unfamiliar. Although DoCoMo has sold 3.34m handsets equipped with a FeliCa chip, only 570,000 users have so far signed up for the Edy service, which has 10m users in total.

DoCoMo believes the take-up is certain to increase as people discover how easy and convenient the mobile wallet is. One advantage of the mobile phone Edy service is that users can view their balance on the screen, together with a record of past transactions.

This has presumably encouraged users to spend more when using their Edy money on their mobile wallet than when using it in the form of a card. According to data compiled by DoCoMo, the average amount spent per purchase is Y630 for people using Edy on their mobile wallet compared with Y500 for those using Edy cards.

Another advantage is that the information in the chip can be altered any number of times depending on what users download from the internet.

But apart from the lack of familiarity, another serious concern is security. Anecdotal evidence suggests that people lose their mobile phone more often than their wallet.

DoCoMo has also introduced a way to lock the mobile wallet to prevent payments being made. Wary users can keep their phone locked and unlock it only when they want to use it. In case the handset is stolen or lost it is possible to lock it remotely by calling the phone. But the phone has to be on in order to activate the lock. Service providers can also de-activate a particular service in a lost or stolen phone.

With Vodafone and KDDI scheduled to launch their own FeliCa-embedded handsets later this year, the mobile wallet is expected to win further acceptance among consumers.

But for the operators, the key issue is finding the right business model to generate revenues from the mobile wallet.

Despite the resources DoCoMo has poured into FeliCa, these services do not yet generate revenue to any significant extent for DoCoMo itself since using the mobile wallet does not involve much telecommunications traffic.

One option is to take the plunge into financial services and generate revenues from the margins that can be made from credit card and other services available through FeliCa phones.

It has taken a step in that direction with a 34 per cent stake in Sumitomo Mitsui Card with which it will launch a credit payment service on FeliCa.